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Portugal Returns To Bond Sales With Strong Demand

The successful auction will give heart to European leaders as evidence that their recovery strategy is paying off as well as provide some valuable political capital for Portugal's coalition government, which is under severe pressure to ease its austerity program.

In another sign of progress, the Portuguese government said earlier this week it expects last year's budget deficit to be lower than the targeted 5 percent. In 2010, the deficit was 10.1 percent.

Portugal is currently paying just over 3 percent in a variable interest rate for the bailout loan, according to the finance ministry.

Portuguese bonds are still classified as "junk" by the three main rating agencies, which downgraded them in 2011. But the yield on Portuguese 10-year bonds, viewed as a key indicator of market sentiment, fell below 6 percent this week for the first time in two years after peaking at 17 percent at the height of the Portuguese crisis. European economic powerhouse Germany's 10-year bonds are at 1.6 percent.

The sale could help qualify Portugal for the European Central Bank's bond-buying program, which was announced last year and is credited with helping quell the eurozone's financial crisis. Under the program, known as Outright Monetary Transactions, the ECB would buy a country's bonds to keep its borrowing costs at a manageable level. Selling national debt on the open market is one of the conditions to qualify for the program which could help Portugal rebound next year when the rescue funds run out.

The eurozone's finance ministers on Monday agreed in principle to extend maturities on some of Portugal's debt, easing its repayment burden and freeing up cash to spend on fostering growth.

Portuguese bankers welcomed the auction and the falling interest rates, saying the knock-on effect of lower borrowing costs will allow them to lend more to businesses. That could be crucial as Portugal struggles to get traction amid a broader European economic slowdown.

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